Economic growth below trend, says Westpac

AUSTRALIAN economic conditions are solid but below average and are likely to stay that way for the coming months.

The Westpac-Melbourne Institute Leading Index, which indicates the likely pace of economic activity three to nine months into the future, rose to 2.2 per cent in July, below its long-term trend of 2.7 per cent.

Westpac chief economist Bill Evans said while the index has recently shown some improvement, it is still below trend.

"Westpac anticipates that more robust growth outcomes for 2013 will require further interest rate relief, particularly given global fragilities and also given the strength of the Australian dollar at a time of weakening global commodity prices," Mr Evans said.

"The contributors to the improved growth performance have been: materials prices; productivity; overtime worked; corporate profits; as well as the share market and the real money supply.

"Partially offsetting this improvement was a fall in US industrial production."

The Coincidence Index, an indicator of current activity, was 2.8 per cent, below the long-term trend of 3.0 per cent, the private survey shows.

Mr Evans said the minutes of the Reserve Bank of Australia (RBA) September 4 board meeting, released on Tuesday, showed the central bank is very close to deciding to cut the cash rate again, following cuts in May and June.

A sharp fall in Australia's terms of trade are behind the RBA's current unease about growth prospects for Australia and the global economy, he said.

Mr Evans said he expects the RBA to hold off until November to cut the cash rate from its current level of 3.5 per cent.

"We also retain our expectation that there will be follow up moves in December and the March quarter," Mr Evans said.

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